While most people know what a foreclosure is, a short sale is still a bit of a mystery. Short sales began to occur more frequently after the 2008 sub-prime mortgage housing crisis, as distressed homeowners found themselves unable to handle their mortgage payments.
Essentially, in a short sale, the homeowner sells a home for less money than is owed on the mortgage. Lenders agree to short sales to avoid the cost and complexity of the foreclosure process, and to minimize their own acquisition of property. While lenders have their own internal short sale processes, there are some similarities across the board.
The Borrower's Role
The short sale process starts with the borrower, who applies for approval from the lender for a short sale. While individual lenders each have their own set of requirements for short sale qualification, most look for financial documentation that proves the borrower can't make their loan payments. The lender may request a professional appraisal to establish the property's current fair market value.
After the borrower returns all the necessary forms and paperwork to the lender and receives preliminary permission for a short sale, finding a qualified real estate agent is the next step. Lenders usually require a licensed real estate agent's participation in a short sale. At this stage, the borrower lists the home for sale, holds showings around the home and does what is necessary to find a buyer for the home.
While buyers may be attracted to a short sale home because of the potential savings, the lengthy process and potentially poor state of the home may act as deterrents. As the borrower is in financial distress, they may not have the money available to make necessary repairs or do cosmetic work.
On the Lender's Side
The lender reviews the borrower's eligibility for a short sale after receiving the borrower's request for permission. According to the Washington State Department of Financial Institutions, the lender must consider all debt relevant to the property to decide if a short sale is economically sound. Any other liens against the home, such as court judgments, property taxes, secondary mortgage loans and other debts are a consideration in a short sale. If there are multiple mortgages on the property, the borrower needs permission from all the lenders, which can be difficult to obtain.
Lenders review short sale offers from qualified buyers carefully. The offers are weighed against the total debt owed on the home, the costs of the sale and the property's established market value. A lender may reject a short sale offer for being too low when all these factors are considered.
Duration and Outcome
The total length of the short sale process depends on the lender involved. Borrowers only have a set period, such as six months, to sell a property after receiving short sale permission. If they can't find a qualified buyer or their deal falls through once the lender's sell period passes, the lender may move ahead with foreclosure instead.
Closing a short sale deal after a lender has approved the offer is similar to closing on a traditional sale, with the added short sale paperwork and forms required by the lender. Everyone involved must comply with the lender's requirements to complete the sale.
If you’re in the market for a new home, you could save some money by exploring the short sale route, but there’s a price to be paid for that opportunity. If you’re a seller who owes more than their home is worth, pursuing a short sale seems worth the trouble in order to avoid defaulting on your loan, ruining your credit, and perhaps winding up in bankruptcy court.